8 things you should know before arranging a mortgage

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8 things you should know before arranging a mortgage

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Planning to take out your first mortgage, wanting to review your current loan or simply want to find out more about the process, this definitive guide demystifies the complex world of mortgages

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Page 1: 8 THINGS YOU SHOULD KNOW BEFORE ARRANGING A MORTGAGE

8 things you should know before arranging a mortgage

Page 2: 8 THINGS YOU SHOULD KNOW BEFORE ARRANGING A MORTGAGE

Anyone who’s been house hunting knows what its like to fall in love with a property. One minute you’re waiting outside for the estate agent, the next you’re choosing carpets and curtains in your head and marvelling that it’s like they just knew you love Victorian bathrooms.

Then you begin the race to buy and all the highs and lows this entails.

Whatever stage you’re at, regardless of whether you’re buying your first property or your twentieth, the chances are you’ll need to borrow money to do it (if not, this guide probably isn’t for you). Selecting and arranging a mortgage is the most significant financial decision most of us ever make. It is a long-term commitment that will affect not just where you live but how you live from day to day. So it pays to get it right.

Yet too many people just don’t get the best mortgage for them.

Everyone’s circumstances are different, while an off the shelf mortgage may be right, this is not always the case. Many people also find the entire process more stressful than it needs to be (and let’s face it, buying a house is stressful enough). And making the right decisions when you arrange your mortgage will allow you to enjoy living in your new home without worrying unduly about your repayments.

In the following brief guide, I’ll take you through eight of the areas I typically cover when I talk to house buyers about financing their new home. I’ll outline some areas you may want to consider and some tips for getting the right mortgage for your individual circumstances.

I hope you find it useful. If you have any questions, you can reach me

at [email protected]

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Getting an agreement in principle

It’s not difficult to see why the mortgage part of a house purchase is the source

of so much worry. You’ve done your sums, you’ve applied the multiples that everybody talks about and you’ve worked out how much you think you can borrow. It’s time to go shopping. But lurking in the back of many people’s heads is a nagging thought: ‘What if the lender doesn’t agree?’

The problem for most people is the only way they really find out – one way or another – is when they are deep into the actual process of buying their house. And if the answer is no they’re sent into a mad scramble to find someone who’ll say yes before the whole deal collapses around them.

Fortunately, it doesn’t have to be this way.

The truth is, you do not need to have found a property to start negotiating your requirements with a lender. Most lenders will offer an ‘agreement in principle’ with a written confirmation of how much you can borrow. While this is not the

same as a formal offer to lend, it does give you some reassurance that you will be able to secure the money you need. Plus it shows the prospective seller that you mean business (which can make all the difference if the property is receiving a lot of attention).

1. Fire, aim, ready

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Mortgaging or remortgaging, you have more options than you think

For many people coming to the end of their fixed or tracker rate periods, the

mortgage market may seem to have altered beyond all recognition. The turbulence in the markets and change in attitude among lenders can make it appear as if your options are limited. And then, of course, there’s the uncertainty about what will happen with base rates over the long term. We all

know they will rise eventually but how far, how fast and when remain a mystery.

The good news is that it’s not all quite so grim as it’s often painted. There are still some highly competitive products around – including fixed rate mortgages that are lower than they have been, or are likely to be, for a very long time. In

addition, many now come with some attractive extras such as free valuations and free legals for remortgages.

So if you are coming towards the end of your current deal, there are two things I recommend you do:

1.! Speak to your current lender to find out exactly what options you have. It may be that you can get a great deal without moving your mortgage

2.! Regardless of how attractive that deal may sound, speak to a reputable, independent mortgage broker about what else is available (shameless

plug: I can help you here)

Importantly, don’t wait until the last days of your current arrangement before doing this. Your position will be much stronger if you give yourself time to explore all the options. So look to start the process at least three months before

your existing deal expires.

2. Uncovering a better deal

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Don’t just have a home, have a life too

Buying a new home can be an emotional rollercoaster. It’s easy to fall in love with a property and think

that no other house could ever compare. And it’s tempting to go to the very limits of what you can afford in order to secure it. But a little caution goes a long way.

As a mortgage broker, I want you to get the house you’ve always dreamed of. But, importantly, I want you to have one which you can afford – this year and the next and the next.

You’ve almost certainly seen the warning on all the literature, “Your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it.” While this can sound like just another piece of legal bumf, it is really important. Too many people still get into terrible trouble by taking on too much debt.

It used to be that mortgage lenders would calculate how much you could borrow based on a multiple of your salary. While this provided a rough and ready figure, it didn’t take into account other expenses you may have. Today it’s more common for lenders to make an affordability assessment instead.

While each company has a slightly different method, all will try to determine your disposable income

based on:

1.! Your total income

2.! Any money you owe, such as loans and outstanding credit card balances

3.! Your household bills and living expenses

While some people believe that this approach will limit their ambitions, personally I think it’s a good thing. It is in no one’s interests – least of all yours – that you cannot afford your new home (or food, light, clothes etc). Your home should be a joy not a prison.

3. Don’t over-stretch yourself

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Interest-only, repayment, over-payment and offsetting

While pretty much everyone buying a house wants a mortgage, they also generally

want to be free of that mortgage as soon as they can. This, of course, means giving the lender back their money with interest. There are, however, multiple ways of doing this.

Back in the 80s and 90s, the vast majority of mortgages were interest-only loans.

So borrowers only paid the interest on what they owed without reducing the debt itself. They’d then use a separate investment to pay off the loan itself.

Often, this was done with an endowment policy which combined life insurance with an investment plan. However, in recent years a combination of high charges

and depressed investment returns has all but destroyed the credibility endowments once had. As such, relatively few people taking out a mortgage today go down this route.

Nowadays, most people choose a repayment mortgage, where part of each

monthly repayment goes towards paying off their loan. With a repayment mortgage, you are guaranteed to pay off your mortgage at the end of the term, assuming that you make all your repayments on time. While the period is often around the 25 year mark, as long as you can afford it and the lender agrees, you

may select a shorter horizon.

Many buyers are now using the current record-low interest rates to overpay their mortgages. In doing so they are both shortening the overall term and reducing the amount they will pay in interest. While this is almost certainly a good idea if you

can do it, you should check whether the mortgage you choose gives you the flexibility you need. Some have caps on how much you can overpay in each year and others have early-repayment penalties. So if you think you will be in a position to overpay, make sure you will not be hindered by the small-print.

4. Paying off your mortgage

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Finally, the other type of mortgage gaining popularity with some buyers is

the offset mortgage. This works by using any savings you place with the lender to reduce the amount of interest you will pay. The best way of thinking about this is that your mortgage becomes a kind of super-overdraft that you pay interest on. Any savings you offset against it then reduce the

interest. For people with large savings, this can significantly reduce the interest you pay and reduce the term of the mortgage.

The right approach for you, however, will depend on your individual circumstances and your plans for the future. Your broker will be able to

advise on the best route forward.

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Myths and mandatories of insurance

With any mortgage, some insurance is compulsory while some is simply

recommended. You will need to take out buildings insurance, for example. This will cover the costs of rebuilding the property if the worst should happen and protects the lender’s investment.

Contents insurance is not compulsory as it has no material effect on the house

itself. Most people do take it out however.

Contrary to many people's understanding, life insurance is not a compulsory insurance. However, you would be foolish not to arrange this cover if you have a partner or children or other dependants. This will ensure they are looked after in

the event of your untimely demise as, typically, such life insurance covers the cost of repaying your mortgage in full.

You may also choose to take out mortgage payment protection insurance (MPPI). Again this is not compulsory but could be invaluable if you lose your job, fall ill or

have an accident and lose your income. In addition, you can also consider income protection or critical illness insurance for added protection.

Beyond buildings insurance, however, what and how much you insure fundamentally comes down to your personal circumstances and attitude to risk. It

is a balance. You must ask yourself how much the added peace-of-mind is worth to you and your family and invest accordingly.

As a final point, you do not have to take out your insurance with the lender. You are free to shop around and get the best deal. That way you can keep your

monthly outgoings as low as possible

5. Protecting yourself

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Knowing where you stand with a fixed or capped rate

We have never seen interest rates drop this low or remain static for so long. It’s

fantastic but, sadly, won’t last. At some point rates will rise. And the question you should ask yourself is: will I still be able to afford my dream house if the repayments suddenly increase?

The are two core strategies for ensuring you can manage you repayments at least

over the foreseeable future.

The first is to opt for a fixed rate mortgage. As its name suggests, this fixes the rate you will pay over a set period so you know exactly how much you will need to set aside every month.

The second is to go for a capped rate. Under this scheme, the interest rate remains variable but is guaranteed not to rise above a pre-agreed ceiling (the ‘cap’) over the period of the agreement.

In general, you are likely to get a lower initial rate for a capped mortgage than for a

fixed rate. This is because you are taking on some of the risk of fluctuations. Which one you choose will come down to your appetite to risk and the deals currently available in the market (so it pays to shop around).

There is one additional strategy that’s not open to everyone but which may pay

dividends in the long run. This involves staying with a variable rate mortgage but taking advantage of the current record low interest rates to overpay each month. Then, when rates do rise, simply leave your overall repayment at the same level (until rates rise to the level that means you must change to make the repayment

schedule). This of course necessitates that you have sufficient funds available to pursue such a strategy.

6. Sleeping easier

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Don’t get caught out by additional costs

There’s always a temptation in buying a house to focus on the really big numbers – the

mortgage – and ignore other costs that can have an impact on what you can achieve. While many of these are inescapable, it pays to be aware of them so that they do not turn up unexpectedly to spoil the party at a later date.

The main fees you should be aware of are:

Solicitor’s fees – these cover the cost of all the legal work around buying a home (known as conveyancing).

Arrangement fees – also known as application or booking fees, these are charged by the lender for the administration costs of setting up your mortgage.

Valuation or survey fees – these pay for the cost of the surveyor who inspects and values your home.

Completion fees – these are payable when you finally complete (‘draw down’) your mortgage and, again, cover the lender’s administrative costs.

The final costs to mention are early repayment charges (sometimes abbreviated to ERCs). These are an additional charge the lender makes should you wish to pay off your mortgage early. Now, at this point you might be thinking ‘I should be so lucky’ but these charges can also kick in if you change your mortgage. They are particularly

common on special mortgage deals (eg fixed rate, capped or discounted). So, for example, if you have a five year fixed rate, you will have to pay an ERC if you want to get out of that deal within the first five years.

As I mentioned before, some of these are inescapable. But not all and not all the time.

Lenders will periodically waive or cover the cost of certain fees as a special offer. Again, your broker should be able to make you aware of any such deals and whether they make sense for your individual circumstances.

7. Gain 20:20 vision on fees

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Where long-term thinking can deliver long-term gain

The buy-to-let market has come a long way since its inception in 1996. With the

number of school leavers heading to university still healthy, immigration continuing at a steady rate and house prices preventing many from buying their own homes, demand for rental property remains keen.

But while the sector can prove profitable for investors if you know what you're doing,

making a quick buck with minimum effort is not so easy. It can take some serious work and a long-term outlook. However, if you know your audience and do everything by the book, you can realise healthy returns from property investment.

While there are risks with almost any investment, property is often seen as more stable

compared to the volatility of, say, the stock market. Landlords have a tangible asset, something they can see rather than a slip of paper telling them what minuscule proportion of a company they own.

Even when house prices are going through stale periods or declining as they are at

present, fundamentally this will not matter unless you are planning to sell the property. As long as the rent is still coming in, you should be able to ride out the storm until prices rise again.

Of course, just like with any property, you will need to fund your purchase. One thing

many first time buy-to-let investors don’t realise is that mortgages for these properties on the whole carry different rules than their owner occupier siblings. They are typically treated more like a business loan (which is, in effect, exactly what they are). So, before you go too far down the road of scouting for two-bed flats within walking distance of

the station, take time to understand how you can raise the money you’ll need.

8. Making the most of buy-to-let

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(The shameless plug section)

Thank you for reading this far. I hope you’ve found this guide useful.

It does, of course, only touch on many of the areas house buyers just like you face in purchasing a property today. While there are some common factors, in my experience, no two buyers are the same. You will have questions about your own individual plans and ambitions that cannot be answered in a guide such as this.

That’s where I can help.

I’m an independent mortgage broker based in Haslemere, Surrey. I help buyers at every level of the market find the best mortgage for their specific needs. And I’d love to talk to you about how you can fund your next purchase.

If you’d like an initial conversation (or simply to ask any questions about what you’ve read here) you can reach me directly on 07771 763485 or at [email protected] There’s no obligation and no hard sell, promise.

And just so you know what other house buyers think about me, I’m including a

selection of their experiences on the next page.

Good luck in your next house purchase.

Matt Blackshaw

www.daltonedwards.co.uk

How can I help?

Dalton Edwards Ltd is an appointed representative of TenetLime Ltd, which is authorised and regulated by the Financial Conduct Authority. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

Page 13: 8 THINGS YOU SHOULD KNOW BEFORE ARRANGING A MORTGAGE

“Matt has done a brilliant job with my mortgage. He has saved

me just under £200 per month. I would definitely recommend Matt and will be using him again.”

Marc Simpson

“Matt is personable and understanding, he listens carefully to

requirements and acts upon them thoroughly. His explanations are clear and concise which is especially helpful when discussing more complex financial matters. I would have no hesitation in recommending Matt to anyone.”

Imogen Wall

“I hired Matt to help me with re-financing my mortgage on the

recommendation of a friend. Matt was very professional and explained the process to me each step of the way. Matt has a strong knowledge of the market and advised me to apply for a mortgage in advance. The result is that he found me a very

favourable interest product just days before the banks increased their rates. Matt was a real star!”

Don Storry

“Matt has done a fantastic job in offering us financial advise.

Not only did he do this but was excellent at managing the whole Mortgage process. The real value came when he managed to switch our mortgage shortly before completion which delivered further substantial savings over the term of

the mortgage. I would highly recommend Matt’s services!”

Will Owen

Call me directly on 07771 763485 or at [email protected]